Oct. 13th, 2015

Site Visit Notes: TerraX Minerals in Yellowknife A visit to TerraX Minerals' Yellowknife City Gold project has put the company on my Watch list. They say the best place to look for gold is in the shadow of a headframe. The problem is that most such shadows have been searched top to bottom. But not all. In late September I visited a project in the shadow of two headframes, left behind by mines that jointly produced 14.2 million oz. gold between 1938 and 2003 from ore averaging 16 grams gold per tonne (g/t). The mines shut down because of labour problems, processing issues, and poor financial management – not because of a lack of gold. That means they are precisely the kind of headframes that could hide gold in their shadows. The project I visited has been explored but a series of owners who were focused elsewhere and then went bankrupt means work was limited. It was also far from thorough. Geologic questions were never puzzled through; opportunities were not pursued. Sounds like a good exploration play…for a company able to raise cash in this market. Enter TerraX Minerals (TSXV: TXR). TerraX raised $6 million in June. A quarter of that funded a drill campaign this summer, plus prospecting, mapping, and trenching. Another $4 million will go into the ground this winter, when frozen lakes make access easy.

The headframe of the Con mine

Some of the raise came from Osisko Gold Royalties, which owns 16.9% of TerraX. Osisko also handed over $1 million for the right to buy a 1% net smelter royalty on the project. This adds to the 2% NSR they already had the right to buy,

acquired in their takeover of Virginia Mines. TerraX management owns 15% of the company, so the guys looking for gold have skin in the game. And the share count is still a nicely constrained 67.4 million.

If all that sounds interesting, let me tell you about the Yellowknife City Gold project (YCGP). Yellowknife was built on gold mining. Located on the northern shores of Great Slave Lake, 400 km south of the Arctic Circle, the capital of the Northwest Territories was born when gold was discovered in 1934. By 1938 the Con mine was in production and by 1948 the Giant mine was too. Half a dozen other small mines came and went, but Con and Giant churned through ore until 2003. Con closed quietly, based on then-owner Miramar Mining’s struggle with high costs and a low gold price. Giant did not go so quietly. The ore at Giant carried considerable arsenopyrite. To recover gold the rock was roasted, which released a plume containing arsenic. A series of systems were installed to capture the arsenic, but that created a growing pile of arsenic trioxide waste. The waste was stored underground, in mined-out areas, but imperfect controls and the volume of waste led to lasting pollution problems. Then in 1992 labour strife hit the Giant mine. In May the miners went on strike. In September, an underground explosion killed nine strikebreaking workers. One of the striking workers was later convicted of setting the bomb.

TerraX president and CEO Joseph Campbell with geologist Eric Herbert

The strike was eventually settled in late 1993, but by then the combination of pollution questions and bad labour blood had poisoned the operation. By 1999 owner Royal Oak Mines went into receivership. Giant never operated again. The government ended up responsible for the arsenic at Giant and a billion-dollar cleanup continues today. Importantly: arsenopyrite in ore can be handled in an environmentally responsible manner. The precise process depends on the ratio of refractory to non-refractory gold, but some combination of autoclave pressure-oxidation and cyanide leaching could likely have recovered Giant’s gold and captured its arsenic safely. Two points from these history lessons matter today. One: neither Giant nor Con closed because they ran out of ore. Two: Royal Oak’s bankruptcy meant the Yellowknife City Gold project, which covers the northern strike extent of the deposit mined at Giant, went almost unexplored for years. When Royal Oak went bankrupt the YCGP was sold to Century Mining, where it sat unattended while Century tried to restart a gold mine in Quebec. That failed and Century also went bankrupt. The YCGP was put up for tender.

It was late 2012 when TerraX heard about the tender. The team signed a CA and headed to Yellowknife for due diligence. They expected to hike around a rocky land package and look at historic records. Instead, they uncovered a trove of historic work. Bad sentiment around the Giant mine had rendered Royal Oak’s exploration information unavailable for years. Now, decades after the strike and with a new team of people interested, the folks who had maintained the records and core from work done on the YCGP handed it all over. President and CEO Joseph Campbell and his team were blown away. “We flipped open an old core logging book and on the first page I saw ore-grade intercepts,” said Campbell. “The data was incredible. Then they walked us over to the core, 200 holes worth. Due diligence done!” TerraX spent much of 2013 understanding the historic information, locating old drill collars, and re-assaying core. The work was worth years of time and millions of dollars. They also walked up and down the property, taking chip and grab samples from areas of interest, and conducted an airborne magnetic, electromagnetic and radiometric survey. When 2014 hit TerraX was ready: it had targets, a drill permit, and enough cash to drill. Two drill programs that year helped focus attention on the Core Gold Area. And focus was needed, because the YCGP has more zones and targets than one company can explore. Why so many targets? Because this is an area riddled with structures.

Dominant in terms of mineralization are the north to northeast structures and late northwest faults. These structures abound in the Core Gold Area; so too do gold targets. The most advanced target is Crestaurum, a shear-hosted zone of orogenic gold that saw more historic work than any other part of the property. Previous owners punched 187 drill holes into the structure, though because the idea was to open-pit mine it none of the holes went deeper than 150 vertical metres.

At Crestaurum three moderately dipping parallel shoots – North, Central, and South – extend along 1.5 km of shear zone strike. Exploration along strike and at depth has been very limited, which is why TerraX focused on those possibilities. In 2014 the company twinned old holes and did some infill work to prove up the known zones. This year TerraX has been testing for dip and strike extensions. It is working. Results so far include 7 m of 10.23 g/t from underneath the known South Shoot zone and 8.9 m of 2.86 g/t, including 2 m of 10.24 g/t, from a 400-metre step-out along strike to the north. With historic holes and new drilling, TerraX has enough information to define a resource at Crestaurum. That calculation will likely be out in early 2016. Expect a high-grade count – not huge, but with a grade that will grab some attention. TerraX will also calculate a resource at Barney, another shear-hosted zone about 1 km to the northeast. Barney is the northern extension of the shear zone that hosted the Con and Giant mines and, while the zone has been tracked along 4.5 km of strike, it has only been drill tested along 600 m. Some of those tests have returned stellar results, like 22.4 m grading 6.35 g/t and 14.1 m grading 2.96 g/t, including 2.4 m of 15.4 g/t. This summer TerraX has been back at Barney looking to extend the zone farther along strike and down dip. There are many other targets around the property. Pinto, an area of gabbro intrusion cut by quartz veins, has produced over a dozen high-grade grab samples, including 108 g/t and 66 g/t, while two channels returned short, gold-rich intercepts. Pinto is due to see a few drill holes this winter. A set of veins sticking out sideways from the south end of Crestaurum, known as the Off Angle Veins, have produced tantalizing results, including grab samples with visible gold grading as high as 547 g/t. The question is whether there are enough veins close enough together to build a sensible resource; TerraX will punch a few holes into Off Angle this winter to find out. The 17 Shear zone also offers some high-grade veins radiating out from a nearby intrusion. Historic drilling at Sam Otto, about 4 km northeast of Crestaurum, produced such intercepts as 4.8 m grading 5.6 g/t, 3.7 m of 6.1 g/t, and 10.1 m of 3.1 g/t. Then there’s Mispickel and Homer Lake and others.

With so many targets, one challenge is staying focused. When the summer drill program started, TerraX figured Crestaurum and Barney were the two top priorities. Other areas would see prospecting and mapping, and possibly a hole if something really interesting surfaced. And it did, though it did not involve orogenic gold in shear-hosted quartz veins. The thing is, TerraX realized there may well be another kind of gold deposit hiding at YCGP – one that is easier to define and quicker to grow. The trail of clues started at the Con mine. At the edge of that property there’s a trench known as the C-1 Shaft Trench that displays the typical alteration zonation around Con gold: sericite-chlorite-carbonate alteration on the outside and sericite-ankerite alteration right beside the mineralized zone. It was so easy to focus on the highgrade gold veins at YCGP that TerraX did not at first think about the significance of this zonation pattern. When it did stop and consider it, TerraX’s geologist realized that The Maven at the Barney zone sericite-chlorite schist flakes are an exploration flag for subcropping gold. The evidence is solid: the C-1 zone at Con produced a million oz. of gold, but the only evidence on surface was a pile of sericite-chlorite schist flakes, left behind when the altered rock overlying the gold zone weathered. So out they went looking. And sericite flakes they found. The first area they found is Herbert-Brent (or Brent-Herbert, depending which of the two discovering geologists you ask!), where TerraX identified three areas of extensive sericite-chlorite alteration within a 75-metre diameter circle. At each area the schist flakes were more than a meter deep, so TerraX had to dig away this layer of weathered rock to get a look at bedrock. At each site the view was the same: a wide zone of heavily sulphidized mineralization hosted in sheared quartz-feldspar porphyry (QFP). Channel samples confirmed the mineralization. At Herbert-Brent, the channel returned 11 m of 7.55 g/t. At Herbert-Brent East, the channel cut 15.3 m of 2.23 g/t, while a grab sample from just up along strike ran 44 g/t. At Herbert-Brent South, a 6-m channel averaged 10.26 g/t.

The grades are great, but what is really interesting is the type of mineralization. Everywhere else at YCGP, gold comes in quartz veins. The veins can carry a lot of gold but they’re veins, which means it would take a lot of drilling to prove up a big resource. At Herbert-Brent, the gold appears to have arrived when a pulse of gold-bearing fluid replaced the mafic host rock with fine needles of arsenopyrite and pyrite. The resulting ‘replacement’ mineralization is not constrained to a vein, but instead flooded through the iron and pyrite-rich host rock as far as the volume of fluid would take it. The channel samples listed above cut across each zone, which suggests the units are 10 to 15 m wide even at surface. And there are likely more. It has only been a few months since TerraX discovered Herbert-Brent. The three zones identified to date radiate off of flexures in the QFP dike. Folds create fracturing and dilation, giving space for fluid movement and, ultimately, mineralization. And there are other flexure points to explore. The potential that Herbert-Brent might offer gold as rich as the other zones at YCGP but in larger volumes was too interesting to ignore. TerraX threw out its drill plan and sent the rig to Herbert-Brent for the last six holes of the summer campaign. The drill was just finishing the last hole when we were there.

These results will be very interesting. If drills return good widths of this replacement-style gold, it could change the game for TerraX. History and geology strongly suggest that there are many gold-bearing veins waiting to be found across TerraX’s property. And veins can really work. But veins require a lot of drilling. And today’s markets have trouble falling in love with projects that need piles of drilling. Markets also have trouble understanding the multiple zones and structures of a vein-based project. However, if this replacement-style mineralization theory holds, ounces could build more quickly and easily. Drilling results from Herbert-Brent will be the first test. The second will happen this winter, when TerraX tests a far larger zone of sericite-chlorite alteration 4 km to the northeast. TerraX identified the altered area just in August, when work on Herbert-Brent was already well underway. The as-yet-unnamed zone is 300 metres across – much larger than Herbert-Brent. Thus, if drilling at HerbertBrent returns the widths, grades, and signs of replacement-style mineralization expected, this larger area offering the same smoke will be really interesting. Joseph Campbell looking at fresh core from Herbert-Brent

It’s not that the vein-style gold at YCGP should be forgotten. It is significant. That kind of gold sustained two mines that produced 14.2 million oz. over 60 years and I would bet the extensions of that same shear system still hold a lot of gold. The vein zones at YCGP will produce the project’s first resources and the grades at Crestaurum and Barney will turn heads. Nevertheless, adding replacement-style gold to the mix would be even better, providing an easierto-drill boost to the kind of high-grade veins that made Yellowknife gold famous. Together, the two kind of mineralization would help TerraX realize its goal, which is to define 5 million oz. gold at YCGP. Yellowknife the city supports that goal. When Con and Giant closed the lifeblood of the city dried up. Thankfully the discovery of diamonds 300 km to the north brought new mining life to the area. However, Ekati and Diavik are fly-in, fly-out operations. While the mines are committed to sourcing certain supplies from Yellowknife, much of the mines’ business flies right over Yellowknife en route to Edmonton, including workers, many of whom live farther south. Yellowknife would love to have another mine near the city to provide jobs and stability. My tour group met with the mayor and a good group of Yellowknife business owners; all voiced support for a mining project done right.

The legacy of Giant’s pollution is still strong, but those I spoke with said Yellowknifers generally understand that Giant was a mistake and that mining can be clean. And YCGP is certainly near the city: it literally extends north from the edge of town. Standing at Barney, the city is easily visible, just 12 km to the south. There’s no need to build an exploration camp when the largest city for hundreds of miles is just down the road. And there are roads. Old roads, ATV tracks, and trails crisscross the property. In the winter, you can get anywhere on the project within a few minute on a snowmobile. Geologic potential. Infrastructure and access. Money. So far, so good. The one aspect left to discuss is the TerraX team. The team area all members of the consulting firm GeoVector Management. GeoVector works for TerraX on a consulting basis, which means TerraX has no permanent employees and thus no constant cash drain. The four principals of GeoVector serve as president, vice president exploration, drilling manager and geophysicist to TerraX; collectively they have experience from project generation to mine management. Several other GeoVector geologists are working on the YCGP and these geologists have either Masters degrees or PhD's and have been with GeoVector for at least five years. The result is a technical team with a wide variety of experience and depth of knowledge who are used to working together. So why is TerraX on the Watchlist? Why the wait? First and most importantly, I do not think there is a rush to buy early-stage exploration companies. Even if gold rises 10%, gold explor-cos will not move much. That means there is time to wait and assess the results from this summer’s drill program. Particularly strong results from Crestaurum expansion drilling or clear evidence of replacementstyle gold mineralization at Herbert-Brent would encourage me to buy. Buying in the fall could also work out well in that TerraX will be one of few juniors drilling this winter (there just are not that many companies will money to explore). So good summer results would set up for a strong winter program, the results of which would ring out in a quiet market. But I will wait to see the results from the summer drilling. Secondly, TerraX is fairly close to its 52-week high at the moment. Getting in at that kind of level limits odds of success, especially in this sideways market. This is a very interesting project in a great location being advanced by an experienced technical team that knows how to operate in the north. TerraX is one to keep an eye on.